Amy Reed 8799975 Econ 140B Homework #2 1. a) Holding all else constant, the effect of one additional year of schooling would increase average hourly earnings by 8.3%. If I had a strong belief that years of high school education were different than years of college education, I would modify the regression to include two separate variables, one including all years of education up and through high school, and one including all years of education post high school. This would allow me to compare the coefficients to compare their different effects. If my theory suggested that there is a “diploma effect,” I would use binary variables for the various degrees, including high school, bachelors, masters, etc. These variables would be 0 if the individual did not obtain the particular degree, and 1 if the individual did obtain the degree. Therefore, the individual would only receive the benefit of the increased average hourly earnings if they obtained the degree. b) The approximation of Exper = Age – Educ – 6 is used because schooling doesn’t begin until the age of 5 or 6 years. This is not likely to resemble years of employment for all sub-groups of the labor force, as females with children often take maternity leave, which can offset their years of experience. Another example of when this approximation would be incorrect would be for students who take time off after college to travel or engage in other leisure activities before embarking on their career. c) Education = 12, experience = 40 – 12 – 6 = 22: ln(Earn)= -0.01 + 0.101(12) + 0.033(22) – 0.0005(22 2 )

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